The IMF suggests that as soon as central banks signal that they are readying themselves to halt QE, bond prices are likely to fall sharply, as investors "run for the door". Interest rates, which move in the opposite direction to bond prices, would jump and central banks might be forced to push up rates even further to prove they have not lost control of inflation.
"The potential sharp rise in long-term interest rates could prove difficult to control and might undermine the recovery (including through effects on financial stability and investment). It could also induce large fluctuations in capital flows and exchange rates," the IMF warned.
The research analyses the potential losses to central banks under three possible scenarios, from a relatively benign one percentage point rise in interest rates, to a much more dramatic six percentage point increase in short-term borrowing costs.
Under the most extreme scenario the losses to the exchequer would be £80bn, so even if the Bank is right about the £60bn gains for the Treasury from QE, that could still blow a £20bn hole in the public finances.
Economists stressed that any direct costs of QE should be weighed against the wider benefits to the economy. Erik Britton, of City consultancy Fathom, said, "the losses could be large - that much is true, and they would be borne by the taxpayer; but that would only be in a scenario where we were back in growth, and the benefits to the Treasury of that would outweigh those costs."
The IMF's researchers stressed that the prospect of losses on central banks' balance sheets should not prevent them from unwinding their unconventional policies, but warned that, "the path ahead will be challenging, with many unknowns."
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t there are clearly serious problems with the way QE is working. "We see bubbles everywhere," said Bill Gross from the bond fund PIMCO.
While the MSCI index of developed world equities has risen 34pc since central banks turned the spigot back on last summer, there has been little trickle down to ordinary people. The wealth gap is growing wider. Professor Woodford said it may be necessary to break the ultimate taboo and deploy QE to fund government projects, injecting stimulus directly into the veins of the economy.
Fed hawks have long been demanding an end to QE3, running at $85bn a month. Some doves are now joining the chorus. San Francisco Fed chief John Williams said the bank could start winding down stimulus "as early as this summer" and hopes to halt bond purchases by the end of the year.
In February the Fed published a paper "Crunch Time" by former governor Frederic Mishkin warning that the Fed's capital base could be wiped out "several times" once yields rise. It said the risks of QE are growing, with trouble compounding fast if it continues into 2014.
Whether the Fed really will start to taper off QE soon is unclear. Economic growth may have slowed to 1.5pc this quarter, close to the Fed's "stall speed" indicator. Core PCE inflation has fallen to 1.1pc.
New housing starts fell 16pc in April. Unemployment claims have spiked again. The 'Philly' and 'Empire State' indexes for manufacturing point to contraction. Capital Economics said it is "jumping the gun" to talk of Fed exit this year, a view echoed by Goldman Sachs.
Ultimately the Fed decision to taper off QE will be decided by chairman Ben Bernanke, his deputy Janet Yellen, and New York Fed chief Bill Dudley. Mr Bernanke will tip his hand in testimony to Congress next week.
Veteran US investor Warren Buffett says the day Mr Bernanke signals a retreat from QE will be "the shot heard around the world". Euphoric markets are clearly betting that he will not do so soon.
Italy Outlines New Steps for Economy
Italy's new government took its first concrete steps, announcing $3.86 billion in measures aimed at giving relief to households and workers amid the country's longest postwar recession.
I know a lot of people on this blog aren't interested but major event overnight in the Precious Metals markets.
The total disconnect from Paper vs Physical is getting to breaking point now after yet another plunge in price:
http://www.zerohedge.com/news/2013-05-19/silver-plunges-yen-stop-surge-triggers-margin-liquidation
With the spot pretty much at levels below what is costs to dig/refine/cast/sell the pressure is now on the Miners. What now, bankruptcy? Withhold stock?
The Physical demand is increasing but these Paper selloffs in the middle of the night are driving the spot down.
think there is a disconnect between the real world and the world of "markets".
I think this has been going on for several years (if not decades) and is the main reason why the financial mess came about.
"Investment" has been replaced with gambling - and all the funny money that has been created is being played with by the idiots that got us into this mess as they hope to have one last roll of the dice and million pound bonus before the whole damn system crashes.
Lets see......what do these business leaders use that us common people use?.....
Health service that is being over run by health tourists... Private health care I bet, on all accounts.
Housing....All own their own house if not Two or Three.
Transport.....well what can we say about Branson when he owns a Airline and a train service.
Tax system..... all have an army of accountants to get round paying as little tax as possible, us common people have to do it ourselves, send in our tax returns that is.
Basically these people do not have the constraints that normal people have and live a totally different life style
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